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2.1 Internet Banking:

With the extensive technology innovation and telecommunications, we have seen
new financial distribution channels increasing rapidly both in numbers and form, from ATMs,
telephone banking to PC banking (Easingwood & Storey, 1996), and Internet Banking is the
latest in the series of technological wonders of the recent past (Mols, 1999).

Following the boom of Internet, the Internet can no longer be considered a fad or the preserve
of techies and computer nerds. Commercial uses of the Net have become the fastest
growing part of the World Wide Web (WWW) (Hamid et al, 2007). About the same time, Internet
Banking was thought to signal a revolution in banking distribution. Banks invested heavily in the
development of the Internet channels (Accenture, 2005).

Internet Banking has experienced explosive growth in many countries and has transformed
traditional banking practice (Mols, 1999). Inevitability, Internet Banking will continue to
revolutionize the current traditional banking industry and offers more opportunity to meet better
consumer services through enhanced interaction, data mining and customization in the Internet
Banking services (Hamid et al, 2007).

Online banking was first introduced in the early 1980s (Kalakota and Whinston, 1997), in which
consumers were provided with an application software program that operates on personal
computer (PC) which can be dialed into the bank via a modem, telephone line and operated the
programs remotely on the consumer PC. However, the lack of Internet users, and costs
associated with using online banking, stunted its growth. It was only in the late 1990s that
Internet Banking really caught on as the Internet explosion had made consumers more
comfortable with making transactions over the web.

During dotcom fallout, it became apparent that Internet Banking was not the panacea banks had
thought it to be. Between 2001 and 2004 Internet Banking investment growth experienced a
significant slowdown. Nevertheless the customer base for Internet Banking was growing steadily
from 2000 to 2005 (Accenture, 2005) Based on Forrester Research, Internet was the dominant
channels besides the branch in 2007. See Figure

With respect to Internet Banking, a common confusion exists between the terms of online
banking, Internet Banking as well as PC banking. The terms Internet Banking and online
banking are often used in the literature to refer the same things.

According to Hamid et al (2007), online banking is another term used for Internet Banking. Both
share the similar meaning. Internet Banking or online banking can be defined as the service that
allows consumers to perform banking transactions using a computer with an Internet connection
(Lloyd, 2007).

Thulani et al (2009) refer Internet Banking as systems that enable bank customers to get access
to their accounts and general information on bank products and services through the use of
banks website, without the intervention or inconvenience of sending letters, faxes, original
signatures and telephone confirmations.
It is the types of services through which bank customers can request information and carry out
most traditional retail banking services such as opening an account or transferring funds to
different accounts, and new banking services, such as electronic online payments via a
telecommunication network without leaving their homes or organizations.

It provides universal connection from any location worldwide and is universally accessible from
any Internet linked computer (Thulani et al, 2009; Perumal and Shanmugan, 2004; Bradley and
Stewart, 2003 and Rotchanakitumnuai and Speece, 2003).

At an advanced level, Internet Banking is called transactional online banking (Sathye,1999). On
the other hand, PC banking is defined as a home banking whereby consumers supplied with a
financial software package on disks, allowing consumers to fill in details offline and then to send
them into the bank over the banks private network.

Unlike PC banking, Internet Banking or online banking does not require proprietary software or
access to a private network (Hamid et al, 2007). ISACA (Information Systems Audit and Control
Association) recorded that more and more banks are transforming their businesses by using
Internet technology to develop or expand relationships with their customers. The extent to which
the Internet is used in a bank depends on the relative maturity of the bank in regard to Internet

Banks offer Internet Banking in two main ways. An existing bank with physical offices, ordinarily
termed a brick-and-mortar bank, can establish a website and offer Internet Banking to its
customers as an addition to its traditional delivery channels.

An alternative is to establish either a virtual, branchless or Internet-only bank. The computer
server or bank database that lies at the heart of a virtual bank may be housed in an office that
serves as the legal address of such a bank or at some other location. Virtual banks provide
customers with the ability to make deposits and withdrawals via automated teller machines
(ATMs) or through other remote delivery channels owned by other institutions (www.isaca.org).

Yibin (2003) and Diniz (1998) identify three functional types of Internet Banking that are
currently employed in the market place i.e. Informational, Communicative and Transactional.

_ Informational - This is the basic level of Internet Banking. Typically, the bank has marketing
information about the bank's products and services on a stand-alone server.

_ Communicative - This type of Internet Banking system allows some interaction between the
bank's systems and the customer. The interaction may be limited to electronic mail, account
inquiry, loan applications or static file updates (name and address changes).

_ Transactional - This level of Internet Banking allows customers to directly execute
transactions with financial implications. The basic transactional site only allows a transfer of
funds between the accounts of one customer and the bank. The advanced transactional site
provides a means for generating payments directly to third parties outside of the bank. This can
take the form of bill payments via a bank official check or electronic funds transfer/automated
clearing house entries.

Internet Banking has been regarded as the most important way to reduce cost and maintain or
enhance services for consumers (Hua, 2009). By offering Internet Banking services, traditional
financial institutions seek to lower operational costs, improve consumer banking services, retain
consumers and expand share of customer. Internet is the cheapest delivery channel for banking
products as it allows the entity to reduce their branch networks and downsize the number of
service staff. The navigability of the website is a very important part of Internet Banking because
it can become one of the biggest competitive advantages of a financial entity (Ortega et al.,

Internet Banking is a process of innovation whereby customers handle their own banking
transactions without visiting bank tellers (Qureshi et al., 2008). Recent evidence suggests that
an Internet-based consumer banking strategy may be effective, with reports of more profitable,
loyal and committed consumers compared with traditional banking consumers (ABA, 2004; Fox,

Thus, contemporary banks now regard the Internet channel as equally important to traditional
channels of branches, automated teller machines (ATM), telephone banking and call centers
(Gartner, 2003). In the new banking environment, Internet Banking is increasingly managed as
an operational activity and an important element of a multi-channel strategy (Black et al., 2002).